Here's why the rebound in the US dollar may have further to run

Currency markets sold the US dollar aggressively last week ahead of Friday’s US non-farm payrolls report, helping to explain the sharp and sudden rally in the greenback that accompanied the stronger-than-expected report.

As seen in the charts below from ANZ Bank, be it among leveraged or real money investors, the US dollar was getting smoked.

Source: ANZ Bank

The charts show net US dollar positioning from the US Commodity Futures Trading Commission’s (CFTC) weekly Commitment of Traders (COT) report, both for leveraged and real money investors.

Net positioning is simply the sum of long and short options and futures positions in a particular asset, in this case the US dollar.

ANZ says leverage funds are typically hedge funds and various types of money managers while real money investors are usually institutional investors, including the likes of pension funds, endowments, insurance companies, mutual funds and portfolio or investment managers whose clients are predominantly institutional.

No matter the group, Irene Cheung and Rini Sen, FX Strategists at ANZ, said both sold the US dollar aggressively in the week ending Tuesday, January 30 — the cutoff date for the CFTC report.

“Leveraged funds were net sellers of the USD for the fifth straight week,” they said in a note released today.

“Funds added $US6.4 billion to take their net short USD positions to $US10.2 billion, bringing net shorts to their highest since October 2017.”

Cheung and Sen said the US dollar selling was broad-based, led by the euro.

“Funds increased their net long EUR positions by $US2.5 billion to $US9.6 billion, the highest since March 2014,” they said.

“JPY also saw robust buying by leveraged funds, in line with its strong price action during the week. [They] were bullish on commodity currencies for the fourth consecutive week.”

Like leveraged investors, asset managers were also dollar sellers. However, in contrast to speculators, they took their net short US dollar position to the highest level on record.

“Real money managers also extended their overall net short USD positions to another record high by $US400 million to USD24.3 billion.”

With short bets against the US dollar increasing sharply, it helps explain why Friday’s strong January non-farm payrolls report — especially for wages — had such a pronounced impact on currency markets, seeing investors square or reverse previously bearish bets they had against the greenback.

Cheung and Sen think that contributed to the move seen over the past few days, concluding that the jobs report could see net US dollar shorts being scaled back this week when the CFTC data is next released on Friday.